Beware the New Zealand Tax Residency Trap

While it was not uncommon before the impact of COVID, post-COVID will see more split families with one part of the family presumably with the children living in New Zealand. The other spouse will be working overseas earning higher income with the ability to travel between the two countries seriously compromised for the foreseeable future.

While this might not be ideal from a family situation, many people in this situation mistakenly believe that the income they earn overseas from one partner often working in a high-income low or no tax jurisdiction is tax-free in New Zealand. Sadly, the chances of that happening are about as likely as us having a COVID cure tomorrow.

An individual is considered to be tax resident in New Zealand if they are physically present in New Zealand for 183 days or more in any 365-day period. The 183 days need not be consecutive, and you are deemed to be resident for the first of those days for income tax purposes. Any part day in New Zealand also counts as a whole day, i.e. if you fly in at 11:55 pm you are here for the entire day for the count purposes.

So while the spouse that is working overseas is unlikely to be in New Zealand under the physical count or presence test, they will likely have a permanent place of abode in New Zealand which is the second test. This is because they will own or rent a home in New Zealand where their spouse and typically family reside and they have a degree of social, investment and family connections. On this basis alone, whether or not they physically set foot in New Zealand, they will likely be subject to income tax in New Zealand on their worldwide earnings.

In some cases, they may reside in a country with which New Zealand has a double tax agreement. Sadly, these are not likely to assist as the double tax agreement tiebreaker test will look at firstly whether a permanent home is available in each country. Given there is a home in New Zealand, there will also be likely a home available in the foreign low tax country where they are working whether rented or employer provided. That still counts. That brings us to the second tiebreaker test then which is closer personal and economic relations. Apart from employment in the low tax foreign jurisdiction, all other connections would typically point back to New Zealand for the spouse based overseas. Thus, the double tax agreement won't provide any relief, and New Zealand can still tax the worldwide income of the spouse living and working in the low or no tax jurisdiction.

COVID will see many spouses and children return to New Zealand to a safer environment, and we cannot see this trend stopping for some considerable time yet. We are hearing that around 300 individuals are returning to New Zealand each day on a permanent repatriation basis.

It is vital that before you make these decisions to come back to New Zealand, you obtain advice around taxation and other matters both in New Zealand and in the foreign country that you have come from. If you don't, as can be shown by this example, the outcomes can be costly.

If you would like to discuss this further please either contact Nigel Smith via the form below or directly via email nigel@covisory.com.